Skip to content

3 Crucial Challenges that are Shaping the Future of Business

2010 March 28

The future, to borrow a phrase, ain’t what it used to be.

When Marshal McLuhan predicted that electronic media would create a Global Village, he foresaw a new reality where old assumptions would no longer apply; barriers would be broken down and human creativity unleashed.  It’s clear that he was on to something.

Here are three key domains that are driving the transformation:

Chaos, Turbulence and the End of Business Statistics

Statistics have, to a large extent, defined business thinking over the last few decades.  In the 1970’s, mathematical wizards created econometric tools such as the Capital Asset Pricing Model (CAPM) and Black Scholes in order to allocate resources, manage risk and guide strategy.

As Nassim Taleb has so enthusiastically pointed out, these models have failed us.  It’s not hard to see why.  The basic assumption, that events are independent, was always problematic and is becoming even more so in an interconnected world.   While the models perform reasonably well most of the time, they  drastically undercount extreme values.

For example, theory predicts that a daily fluctuation in the stock market of 7% should only happen once every 300,000 years, that’s about as close to a sure bet as you can imagine.  However if you bet the farm on that assumption, you would have lost it 48 times over the last 100 years.

Moreover, the under-counting goes both ways.  Not only are enormous downside risks miscalculated, so are fantastic opportunities.

The Emerging Science of Networks

While social media has been getting most of the attention, it is social networks that we really need get hold of.  As we are becoming increasingly interdependent, it is becoming crucial to better understand how those connections work.

Much like chaos, network science is upending old ideas about how we should evaluate markets, target consumers and run organizations.  New types of business analysis, not surprising based on the same underlying math as chaos, are still primitive, but powerful nonetheless.

Moreover, network science isn’t just limited to people.  It is being applied to cancer research, ecological systems and electrical grids.  Anywhere things connect, network theory is being employed.

The Semantic Web and The Web of Things

The web, as we know it, pertains to documents.  We browse web pages which contain text, pictures and even video.  That in itself was revolutionary.   However, as Tim Berners-Lee says “It isn’t the documents which are actually interesting, it is the things they are about!”

The Semantic Web, which uses meta tags to allow computers to communicate with each other directl, is the next frontier.  The power to effectively combine databases will revolutionize how we manage supply chains, design products and research opportunities.

Increasingly, the semantic web is becoming a web of things, where not only documents and databases are connected, but electronic components and appliances as well.  We are not only becoming more attached to our devices, but they are becoming more intertwined with each other.

Of course, the new semantic technologies are creating even greater interdependence, which is driving chaos and a more networked world.

How to Meet the Challenges of Turbulence and the Networked World

In the old business environment, we would routinely make assumptions that are becoming less and less tenable.  Organizations, industries and societies used to be isolated enough that we could take a reductionist approach.  Statistical techniques were, for the most part, effective because they were right more than they were wrong.

A more turbulent world raises the stakes because a wrong assumption, if left to its own devices, can wreak havoc.  Whole industries can be torn apart and, as recent events have shown, even the world economy itself can be laid asunder.  We need to re-examine what we thought we knew.

Here are some strategies to cope with the chaos:

Believe in Luck: Conventional analysis only takes into account what we already know.  Breakthrough ideas and disastrous events, almost by definition, are in the realm of the unknown and unexpected.  It’s no longer safe to extrapolate from past experience.  No one knew that they wanted an i-Pod until they actually saw one.

Luck, which is really just another word for things we don’t understand, increasingly must be taken into account.  LTCM, a hedge fund run by Nobel prizewinning economists, lost hundreds of billions of dollars because they didn’t account for bad luck.  They expected the future to follow the past.

From a marketing standpoint, it makes even more sense to account for luck.  Companies like Microsoft, Google and Apple routinely invest in untested technologies for exactly that reason.  Betting only on sure things is a sure path to mediocrity.

Search Weak Links: In the old business environment, it was enough to listen to customers.  These days, you need to know what’s going on several degrees of separation away: your customers’ customers’ customers.

One who understood this better than most was Richard Feynman. He would explore domains far away from his specific area of quantum physics and in doing so pioneered new fields such as nanotechnology and quantum computing.

Admit You Don’t Know and Give Up The Illusion of Control: Risk management in the 21st century is becoming less mathematical and more judgmental.  Great businesses are built not through strategic integrity, but through transcending domains.  Paradigms are no longer switched as much as they are merged together.

The old statistically driven business world was built on false certainty and control.  It worked well enough when things moved slower and mistakes were punished less harshly.  Markets today aren’t so forgiving.

Build Extended Competencies: In 1990, Hamel and Prahalad suggested that corporations were defined by their core competencies (pdf) .  Today, companies are dependent on their extended competencies: those of their partners, supplies and customers.

This last point is probably the most important, because interconnectivity goes both ways.  Not only can seemingly distant events affect us, but we also touch our environment to a greater extent than we ever did.

Even in a web of documents, databases and things it’s still people that make the difference.

19 Responses leave one →
  1. March 29, 2010

    Another excellent post Greg!

    It was a very similar line of thought that has led me to use network analysis as my primary research tool. Network analysis is good precisely because things are so much more interdependent than is generally believed. I still have fairly intense arguments about this though with my colleagues that have built careers on regression analysis of large panel data sets…
    .-= Tim Kastelle´s last blog ..Experiments – the Key to Innovation =-.

    [Reply]

    Greg Reply:

    Tim,

    Thanks. I really liked your experiments post btw.

    – Greg

    [Reply]

  2. March 29, 2010

    Greg, always love your posts and this is no different. Running a business is so much more psychological than many people give it credit for. Your articles always articulate these points extremely well.

    Thanks,

    Matt B

    [Reply]

    Greg Reply:

    Matt,

    Thanks for your support!

    – Greg

    [Reply]

  3. March 29, 2010

    Really like the concept of believing in luck, but based on smart positioning and trying to see around corners. The ability to innovate and connect the dots is becoming harder and more of an art form since the past is not necessarily a predictor, and circumstances (good and bad) can come out of anywhere.

    I just uploaded a post on Executive’s guide to software product innovation which is related to this and I hope you find useful.
    .-= Paul Heath´s last blog ..10 Startup Anti-Patterns =-.

    [Reply]

    Greg Reply:

    Thanks for the link, Paul. Interesting.

    – Greg

    [Reply]

  4. March 29, 2010

    This is the first time I’ve seen the Black Scholes model cited in relation to media! I had a brilliant buddy in business school who applied advanced math to horse betting when he wasn’t fine tuning Black Scholes. The recommended bet was always the favorite. I argued that to make real money you actually needed to know something about the horses, the betters etc. That being said, judgment is the way we actually think, but statisitics remain a good way to test and develop ones thinking.

    [Reply]

    Greg Reply:

    Roger,

    Thanks for you input.

    – Greg

    [Reply]

  5. Brooke permalink
    March 30, 2010

    This is a GREAT article! When they named it the “web”, do you think they realized what it would grow into? Thousands of tiny little threads interconnecting people, places, things, ideas – linking everything into this tangled “web” of information. It’s not so much to connect the dots an innovative way, as much as it is to know which thread to follow to which dots, and how deep one should go. Thank you so much for sharing!

    [Reply]

    Greg Reply:

    Brooke,

    Thanks. I’m glad you liked it.

    – Greg

    [Reply]

  6. Denilson permalink
    April 1, 2010

    Great post! I’m wondering whether traditional methods for developing business plans are (or aren’t) appropriated for novel products…

    [Reply]

    Greg Reply:

    Denilson,

    It’s an interesting point. Oddly, I think business plans are okay because uncertainty is taken as given. The numbers are supposed to be taken with a grain of salt and the process of working through the business plan is often more valuable than the business plan itself.

    You don’t write a business plan to predict what will happen, but to prepare for what might happen.

    Also, I think it should be said, most managers do understand this. Most companies do maintain a wide margin of error, invest in “blue sky” projects, etc.

    The problem only comes when people without direct management experience (i.e. traders and consultants) get too much influence over decision making. You can do predictive modeling in an excel sheet and it will work very well the overwhelming majority of the time.

    That false sense of security won’t help you when the model inevitably breaks down along with everybody else’s models that predicted the same thing yours did and network effects kick in.

    – Greg

    [Reply]

  7. April 2, 2010

    Nice picture of the future.

    When You write about emerging science of networks and weak links, it reminds me Ronald Burt and his book “Brokerage and Closure: An Introduction to Social Capital”. It is one of my favourite books about networks. It goes deep into how social networks are a capital, and explaine very well the power of brokerage and its links with closure. Refreshing when everything goes to fast.

    Regards,

    [Reply]

    Greg Reply:

    Frédéric,

    That’s one I haven’t read. Thanks for the tip!

    – Greg

    [Reply]

    Frédéric Abella Reply:

    You’re welcome.

    Frédéric
    .-= Frédéric Abella´s last blog ..Qui fait les applications de l’Iphone? Apple, les marques, les médias,… Non. Les développeurs. =-.

    [Reply]

  8. Satinder permalink
    May 9, 2010

    This is great Greg. Really love it. This shows how true the thought “The flutter of a butterflie’s wings can create a wind in some other part of the world” is, not only in the metaphysical but also in ‘true’ material world.

    [Reply]

    Greg Reply:

    Thanks Satinder.

    Have a great week!

    – Greg

    [Reply]

  9. September 11, 2012

    Greg, congratulações! Interessante e Inovador; novo approach!

    [Reply]

    Greg Reply:

    Obrigado:-)

    – Greg

    [Reply]

Leave a Reply

Note: You can use basic XHTML in your comments. Your email address will never be published.

Subscribe to this comment feed via RSS

CommentLuv badge